Sears Adds Stake in Sears Canada (SHLD)

Posted on Friday, 23rd April 2010 by James Martin

Sears Holdings (SHLD)

Not long ago, many investors expected Sears (SHLD: Charts, News, Offers) to fold under its own weight in the face of stiff competition from Wal-Mart (WMT: Charts, News, Offers), Target (TGT: Charts, News, Offers), Kohl’s (KSS: Charts, News, Offers) and Home Depot Inc. (HD: Charts, News, Offers), just to name a few. Sales figures certainly have not looked good for Sears for a long time. And from outside in, Sears and Kmart looks like two dinosaurs waiting for extinction. The situation didn’t look any better when Sears announced a shocking $94 million loss late last year. Could the company finally break out of its losing streak and return to its former glory?

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Stock Analysis

Perhaps… Things are definitely looking better for Sears recently. On Thursday, Sears gave a profit forecast and indicated that it may exceed Wall Street expectations; specifically, its Sears U.S. department stores returned to positive sales for the first time in six years and Kmart saw its third straight gain (after 14 straight loss). Moreover, it announced today that it is buying additional shares of Sears Canada. It said that it has signed an agreement to buy 18.7 million shares of Sears Canada at C$30 a share from Bill Ackman’s Pershing Square Capital Management (who prevented the initial attempt in 2006). The shares represent around 17% of the outstanding shares in Sears Canada. This will add Sears’ stake in the better-performing unit to 90.4%. Under Canadian securities law, this will allow Sears to eventually buy out the rest of Sears Canada.

However, it is still too early to celebrate. Sears, with its 3,700 plus stores, owns a lot of real estate, which represents a major overhead cost for the company. In term of sales per square foot, Sears is not competing effectively against its traditional competitors. The average sales per square foot in 2009 at Sears stores was $111 and at Kmart stores $107, compared with $280 at Target and $416 at Wal-Mart, according to retail research firm Kantar Retail. In an attempt to close the gap, Sears has quietly launched SHC Realty, which will help Sears utilize its real estate more effectively. The first win came when Sears announced that it signed an agreement with Florida-based Edwin Watts Golf Shops LLC to operate 12 shops inside Sears stores.

Another area where Sears seriously lagged behind is in the online space. The gap is not severe with respect to its traditional competitors, but against Amazon.com (AMZN: Charts, News, Offers), it’s obvious that Sears is operating at a major disadvantage due to its “real” burdens. This too is under the radar, and Sears management has been furiously attacking this problem. According to The Wall Street Journal, “Over the past 12 months, Sears Holdings Corp. has launched a flurry of web sites and mobile-phone applications in an attempt to stretch sales beyond the physical borders of its aging stores. The strategy, dubbed “Shop Your Way,” is to market millions of items virtually, as well as in retail outlets, while offering various delivery and pick-up options. As the main Sears Web site now boasts: “Buy online, then go to the store and get your item within five minutes.””

Sears shares have performed admirably during the past 52 weeks, rallying more than 80% during this time frame. The stock price is also doing well today after the good news. However, this is just a short-term win after a long and exhausting losing streak. Sears is a long way from being efficient in term of sales per square foot. Also, competition for online retailers will continue to bite into its market share. Does this mean Sears is fated for extinction? Probably not. It is still one of the most diversified retailers in the United States, and it is evident that management are aware of the biggest problems and are actively working to correct them.

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